Case No. 65 of In the matter of

Transcription

1 MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai Tel. No /65/69 Fax mercindia@mercindia.org.in Website: Case No. 65 of 2011 In the matter of Application of Reliance Infrastructure Limited for grant of Distribution Licence in and around suburbs of Mumbai inclusive of area covered under Chene and Varsova which are contiguous with Applicant s existing area of licence Shri V.P. Raja, Chairman Shri Vijay L. Sonavane, Member Reliance Infrastructure Limited Registered office: H-Block, First Floor, Dhirubhai Ambani Knowledge City, Navi Mumbai Applicant ORDER Dated: August 11, 2011 Background A Licence called The Bombay Suburban Electric Licence, 1926 came to be granted on May 29, 1926 under the Indian Electricity Act, 1910 to certain individuals carrying on business in partnership under the name and style of Messrs. Killick, Nixon & Company and Calendar s Cable & Construction Company Limited. The said Licence was thereafter assigned to Bombay Suburban Electricity Supply Company Limited on May 13, 1930 with subsequent amendments from time to time. The name of Bombay Suburban Electricity Supply Company Limited was changed to BSES Limited and subsequently to Reliance Energy Limited under the provisions of Section 21 of the Companies Act, Thereafter, the name Reliance Energy Limited (REL) was changed to Reliance Infrastructure Limited (RInfra) on April 28, 2008 under the provisions of Section 21 of the Companies Act, In terms of the first proviso to Section 14 read with the first proviso to Section 16 of the Electricity Act, 2003 (hereinafter referred to as the 2003 Act ), the Commission was required to specify general or specific conditions of licence Order- Case 65 of 2011 Page 1 of 38

2 applicable to licensees referred to inter alia in the first proviso to Section 14 of the 2003 Act. Accordingly, as BSES Ltd was engaged inter alia in the business of supply of electricity on the appointed date mentioned in the first proviso to Section 14 of the 2003 Act, and since the name BSES Ltd subsequently came to be changed to REL under the provisions of Section 21 of the Companies Act, 1956,, the Commission notified the Maharashtra Electricity Regulatory Commission (Specific conditions of Distribution Licence applicable to Reliance Energy Limited) Regulations, 2008 on August 20, 2008 (hereinafter referred to as the 2008 Regulations ). The 2008 Regulations specify amongst other conditions, the following:- 5. Term of Licence Subject to the provisions of the Act, the Licence shall remain in force till 15 th August 2011, i.e., the remaining period for which REL shall be deemed to be a Distribution Licensee under the Act. 2. RInfra filed a Petition on November 1, 2010 (amended subsequently and finally submitted on March 4, 2011), registered as Case 78 of 2010, with the following prayers: a) The Distribution Licence of RInfra be extended for a period of 25 years with effect from June 10, 2003 or in the alternative with effect from August 16, 2011 under the provisions of Section 15 (8) read with Section 18 of Electricity Act 2003 and Regulation 5 of Specific Conditions Regulations and be amended accordingly. b) In the alternative to (a) above, the Hon ble Commission may be pleased to renew and/or grant Distribution Licence to RInfra for a period of 25 years with effect from August 16, 2011 under the provisions of Section 14 read with Section 16 of the Electricity Act c) For such further and other reliefs as the nature and circumstances of the case may require. 3. In the meanwhile, the Commission published an Invitation for Expression of Interest for Distribution of Electricity in the Suburbs of Mumbai, on October 6, In responce, by November 4, 2010, the Commission received Expressions of Interest (EoI) from the following eight applicants,namely, Maharashtra State Electricity Distribution Company Limited; Torrent Power Limited; DPSC Limited; Lanco Infratech Limited; GMR Energy Limited; Indiabulls Power Limited; Tata Power Company Limited; and Enzen Global Solution Pvt. Limited. Subsequently the Commission advised all these applicants through separate letters to submit applications for grant of Distribution Licence before the Commission in accordance with the applicable Regulations of the Commission and the provisions contained in the Electricity Act 2003 (hereinafter referred to as the 2003 Act ). Order- Case 65 of 2011 Page 2 of 38

3 Four out of the above eight applicants, namely, Lanco Infratech Limited, Indiabulls Power Limited, Torrent Power Limited and Maharashtra State Electricity Distribution Company Limited applied for the Distribution Licence. 4. However, RInfra did not respond to the aforesaid Invitation for Expression of Interest for Distribution of Electricity in the Suburbs of Mumbai. As regards RInfra s aforesaid petition in Case 78 of 2010, the Commission passed an Order dated April 1, 2011, wherein, while the prayers were not granted, it was held that for grant of licence, RInfra needed to comply with Section 15 of the 2003 Act, read with the requirements under the Maharashtra Electricity Regulatory Commission (General Conditions of Distribution Licence) Regulations, 2006 for applying for grant of licence to distribute electricity. 5. Consequently, on April 25, 2011, RInfra submitted an application for grant of licence to distribute electricity in the area of supply as mentioned in the 2008 Regulations (i.e. the Mumbai suburban area excluding Bhandup and Mulund), plus the areas of Chene and Varsova. 6. It has been submitted that BSES Ltd s area of supply included the area of the Municipal Council of Mira Bhayandar till Thereafter, the Government of Maharashtra by a notification dated January 10, 1990 revised the Mira Bhayandar Municipal Council area to include the areas to the East covered by the revenue villages of Chene and Varsova. RInfra has proposed to include the revenue villages of Chene and Varsova within the application for grant of licence, which are said to be contiguous to its existing area of supply. It has been submitted that this would also fulfil the criteria of minimum area of supply as specified in the National Electricity Policy and the Distribution of Electricity Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules The application has been submitted under the provisions of Section 14 read with Section 15 of the 2003 Act and in accordance with the provisions of the MERC (General Conditions of Distribution Licence) Regulations, RInfra, however, submitted the said application on April 25, 2011 without prejudice to its right to challenge the Commission s Order dated April 1, 2011 in Case 78 of This said application was registered as Case 65 of The prayers set out in the application are as follows:- a) admit the accompanying application submitted herewith by RInfra for grant of Licence; b) be pleased to grant Distribution Licence to RInfra for a period of 25 years with effect from 16 th August 2011 in accordance with the provisions of Section 14 read with Section 15 of the EA 03 read with MERC (General Conditions of Distribution Licence Regulations,2006); Order- Case 65 of 2011 Page 3 of 38

4 c) be pleased to allow addition, alteration, changes, modifications to the Application if deemed necessary at a future date; d) allow or grant any other relief, order or direction which the Hon ble Commission may deem fit; e) condone any inadvertent omissions / error / shortcomings in the Application. 9. The application submitted by RInfra was analysed for data gaps. The data gaps were then communicated to RInfra through letter no. MERC/Case No. 65 of 2011/00215 dated April 29, RInfra submitted its response vide its letters dated May 2, 2011 and May 4, The Technical Validation Session (TVS) for RInfra s application was held on May 5, 2011 at the Commission s office. The details of RInfra s application, the identified data gaps, RInfra s response and the TVS presentation by RInfra were hosted on the website of RInfra on May 10, Admission of RInfra s application and Public Notice 10. After having examined the data gaps, and holding of Technical Validation Session (TVS), the Commission admitted RInfra s application for Grant of Distribution Licence on May 5, 2011 and directed RInfra to issue a Public Notice on or before May 10, 2011 in compliance with Section 15(2) of the 2003 Act read with Regulation 5.3 of MERC (General Conditions of Distribution Licence) Regulations, RInfra informed the Commission that it published a notice on May 10, 2011, of its application for grant of Distribution Licence in two (2) daily English newspapers (Times of India & Hindustan Times) and in two (2) daily Marathi newspapers (Saamana & Loksatta) having circulation in the proposed area of supply. A copy of the same was made available on the Commission s as well as RInfra s websites. According to the notice, RInfra invited suggestions and/ or objections on its application within thirty (30) days from the date of publication. The objections received in response to this notice have been analysed in the subsequent portions of this order. 12. In accordance with Section 15 (2) (ii) of the 2003 Act, and in order to ascertain whether the Central Government could have any objection to the grant of licence, in the event the proposed area included the whole or any part of any cantonment, aerodrome, fortress, arsenal, dockyard or camp or of any building or place in the occupation of the Central Government for defence purposes, the Commission issued letters to the concerned ministries of the Central Government (Ministry of Defence, Ministry of Civil Aviation, and Ministry of Shipping) inviting objection(s), if any, with reference to the application of RInfra for grant of Distribution Licence. However,the Commission did not receive any objection in this respect within 30 days from the date of the issuance of the said letters. Order- Case 65 of 2011 Page 4 of 38

5 Objections raised against application of RInfra 13. In response to the public notice published by RInfra of its application for grant of Distribution Licence, the Commission received many suggestions in support of grant of distribution licence to RInfra. However, the Commission also received several objections from various stakeholders and members of the public against the application submitted by RInfra. These objections have been classified broadly under the following heads depending on the reason for which such objections have been raised. Objection 1: Sudden Tariff Hike/ Excessive Bill Some of the respondents have objection to the sudden tariff hike in electricity bills of their premises after September 2010, some have even alleged that the tariff hike have been 100%. One objector, while objecting to the tariff hike, suggested that Tata Power Company should take over RInfra s area of supply and sell power to this area instead of selling power in the open market. One objector alleged that RInfra raises bill without reading the meters. In addition, the same person objected to the levy of Rs. 500/- against dishonoured cheques. RInfra s response Sudden tariff hike of RInfra is attributed to different tariff rates existing pre and post September 2010 due to vacation of stay on tariff increase by the Commission. RInfra follows the tariff orders wherein tariff is determined by the Commission from time to time. RInfra is in the process of sourcing power at cheaper rates for Long Term through competitive bidding, which will enable RInfra to lower the tariffs in the years to come. RInfra levies charges for dishonoured cheques as per the Schedule of Charges approved by the Commission vide Order dated November 2, Commission s view RInfra has submitted to the Commission that it has taken adequate steps for economical procurement of power through long-term tariff based competitive bidding. These issues have also been dealt with in the subsequent parts of this Order under the head Power Procurement Plan. Objection 2: Dissatisfaction with Reliance s Service One of the respondents expressed his dissatisfaction about RInfra s service without mentioning any specific details. A few alleged that in RInfra s area of supply, there are, (i) Supply interruptions at night and without any intimation; (ii) R-Infra meters are bogus, they run fast and they charge more than actual usage; and (iii) Customer Service is of very low level. Order- Case 65 of 2011 Page 5 of 38

6 RInfra s response All issues raised are under purview of this Commission. As per Maharashtra Electricity Regulatory Commission (Electricity Supply Code and Other Conditions of Supply) Regulations, 2005 RInfra provides toll free helpline number, contact, address, phone numbers and Ids of the customer care office and grievance redressal forum on the electricity bill for reference of the consumers. Also, (i) RInfra does not resort to load shedding in its area of supply. The load shedding mentioned may be in some isolated cases of no supply in the area in question due to maintenance activities. RInfra always tries to inform the residents well in advance regarding any maintenance activities; (ii) RInfra s meters are tested before installation and have been found to be in the accuracy range as prescribed in the CEA Regulations. Complaint can be registered regarding meter at complaint centre and the consumer can get the meters tested; and (iii) RInfra has been rewarded and recognised by different forums for consistently maintaining a world class consumer service quality. Commission s view As part of the responses received from various stakeholders in relation to RInfra s notice on application of Distribution Licence, the Commission has received various appreciations from the public that RInfra s services are satisfactory. Nonetheless, the grievance redressal mechanism under the Maharashtra Electricity Regulatory Commission (Electricity Supply Code and Other Conditions of Supply) Regulations, 2005 read with the Maharashtra Electricity Regulatory Commission (Consumer Grievance Redressal Forum & Electricity Ombudsman) Regulations, 2006, can be availed of by the aggrieved consumers in relation to service related complaints. As such, in view of the converse response from many consumers, the Commission is not inclined to accept the ground raised for disqualifying the applicant from the grant of licence. Objection 3: Future of employees of RInfra One employee of RInfra, who was earlier working with erstwhile BSES, raised questions about the future of the employees of Reliance Energy in case Reliance Infra does not get the licence. In addition, a few other persons have raised the same concern. RInfra s response No response has been received from RInfra. Order- Case 65 of 2011 Page 6 of 38

7 Commission s view The objector has not explained as to how the objection raised could be a ground either for disqualifying an applicant from the grant of distribution licence or from supporting the application for the grant of distribution licence. Objection 4: Publication of notice in local newspaper One of the respondent alleged that RInfra has not published its notice in any local language newspaper. RInfra s response As per clause of MERC (General conditions of Distribution Licence) Regulations, 2006 the public notice was published in English (Times of India & Hindustan Times) and local language Marathi (Saamana & Loksatta). Commission s view RInfra has published the notice in accordance with the Regulations of the Commission and it had informed the Commission accordingly with documentary evidence. As such, the objection raised has no substance. Objection 5: Chene and Varsova still rural areas The villages Chene and Varsova falling under Mira Bhayandar Municipal Corporation are Revenue Villages and have ceased to be villages after January 10, 1990 as per Gazette Notification published by the Maharashtra Government, Notification No. VPM.1189/CR- 2939/22 as per Bombay Village Panchayat Act, The said Revenue villages are now part of Mira Bhayandar Municipal Corporation and they continue to be Revenue Villages under the Jurisdiction of the Collectorate of Thane District and not of Mumbai Suburban District. Therefore, these villages are still under Rural Area and have not been declared as urban area as contemplated by RInfra in its submission dated May 4, RInfra s response Vide Govt. of Maharashtra Gazette Notification No. VPM.1189/CR-2939/22 dated January 10, 1990, the revenue villages of Chene and Varsova along with few others (mentioned in the notification) became part of Mira Bhayandar Municipal Corporation (MBMC). They ceased to be villages with effect from the date of Notification and are no longer rural areas. Order- Case 65 of 2011 Page 7 of 38

8 Commission s view There is no impediment to the grant of licence even if the said areas are rural areas or urban areas as the Commission is empowered under Section 14 of the 2003 Act to grant licence to distribute electricity to a person as a distribution licensee in any area as may be specified in the licence. Objection 6: Chene and Varsova part of Licence area already The map shows that this area was part of the area of supply for Distribution of Electricity under the Bombay Suburban Electric Licence, 1926 as well as under the Licence granted to Tata Power Company Limited for distribution of electricity up to August 15, 2011 and August 15, 2014 respectively. It was never the area of supply falling under the Licence of MSEDCL or any other Licensee. RInfra s response RInfra s existing area of supply covered the Mira Bhayandar Municipality area and since the said villages were added later; RInfra has proposed to include those areas in its proposed application for grant of Licence. RInfra also attached a map with its reply showing the described areas. Commission s view The revenue villages of Chene and Varsova were not part of the area of supply in the The Bombay Suburban Electric Licence, Later on, these revenue villages of Chene and Varsova were added in the Mira Bhayandar Municipality area. Now, in the present distribution licence application, RInfra seeks to add these revenue villages of Chene and Varsova to the area of supply mentioned in the The Bombay Suburban Electric Licence, 1926, and saved in the 2008 Regulations. The Commission noted RInfra s submission that it has included these revenue villages of Chene and Varsova to its existing area of supply, in order to make the proposed area of supply conform to the minimum area of supply prescribed in the Explanation to Rule 3(2) of the Distribution of Electricity Licence (additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, As such, the Commission is of the view that the objection raised has no substance. Objection 7: RInfra has not replied to data gaps in the application RInfra, in reply to data gaps, has not provided the actual data needed pertaining to top 5 projects in the preceding five years. Order- Case 65 of 2011 Page 8 of 38

9 RInfra s response RInfra has submitted the details vide its letter dated May 4, 2011, in response to pre-tvs data gaps. Commission s view The Commission notes that RInfra has provided the requisite details in its response to the data gaps. Objection 8: Not disclosing amounts in Audit report RInfra has not disclosed the amount of Rs. 100 crore and Rs crore being shown in the Audit Report of the years , , and as Reserve Surplus Funds Reserve for Power Project and Development Reserve Account No. 3 on Page No. 717 of Annexure No. 7, page no. 873 of Annexure No. 8, and Page 1050 of Annexure No. 9. It is not clear if these amounts are collected from consumers or from the market. It is also not disclosed whether it falls under the domain of RInfra or not. RInfra s response Rs. 100 crore and Rs crore worth of development reserves were created out of clear profit of RInfra-D (erstwhile BSES) in respect of the relevant financial years as per the Sixth Schedule of the Electricity (Supply) Act, 1948 with approval from the State Government. Rs. 100 crore is assigned and utilized for generation projects and Rs crore is specifically utilised for distribution system up gradation and was deducted from the capital base for arriving at the reasonable return. As per MERC (Terms and Conditions of Tariff) Regulations, 2005, the said amounts do not form a part of the tariff. Commission s view The objector has not explained as to how an allegation that the applicant has not disclosed certain amounts in the Audit Report of the years , as collected from consumers or from the market, could be a ground to disqualify the applicant from the grant of licence. If the objector is aggrieved with the contents of the Audit Report, then he / she should initiate appropriate proceedings as may be advised in law. As such, this objection is beyond the ambit of consideration for the grant of Distribution Licence. Order- Case 65 of 2011 Page 9 of 38

10 Objection 9: Security deposit not shown The security deposit collected from the consumers has not been shown after the consumers have changed over from RInfra to TPC after the interim Order dated October 15, RInfra s response After migration of consumers from RInfra to TPC, when claimed by them, the security deposit of such consumers is refunded after adjustment of the last unpaid bill. In respect to the list attached, the relevant consumers may be advised to approach the relevant internal grievance cell (IGR) cell to resolve the grievance(s). Commission s view The objector has not explained as to how an allegation that security deposits collected from the consumers has not been shown by RInfra after the consumers have changed over from RInfra to TPC, could be a ground to disqualify the applicant from the grant of licence. If the objector is aggrieved, then he / she should initiate appropriate proceedings as may be advised in law. In any case, this issue pertains to the Commission s Interim Order dated October 15, 2009 whereby consumers of RInfra were allowed to exercise choice of availing supply from TPC while being connected to the distribution system of RInfra. As such if a consumer has any issue with regard to aspects incidental to the Commission s Interim Order dated October 15, 2009, and how the same is to be dealt with once the said consumer has exercised the choice of availing supply from TPC is not a matter which could be called into question for disqualifying RInfra from grant of licence. As such, this objection is beyond the ambit of consideration for grant of Distribution Licence. Objection 10: Complications regarding lease agreements The lease/rent agreement of the distribution substations, consumer substations were entered into with the consumers as per the Regulation 5.5 after the date of publication of MERC Supply Code Regulations, However, for the consumers who have migrated to TPC after October 15, 2009 or going to migrate to new distribution licensee, there may be complications regarding the lease/rent agreement(s). There may be problems after August 15, RInfra s response RInfra has refrained from replying as the query has been raised under the assumption that RInfra-D may not be granted a licence for the period after August 15, 2011 when the issue is pending before the Commission. Most of the consumers who have migrated to Order- Case 65 of 2011 Page 10 of 38

11 TPC after October 15, 2009 are being supplied through RInfra-D network and there will not be any problem regarding lease/rent agreement for the distribution substations/ consumer substations. In case of new distribution licensees, they will have to construct their own distribution substations/ consumer substations and therefore the new distribution licensees will have their own lease/rent agreements. Hence, there is no way the consumer may suffer any problem due to this issue. In any case consumers may approach the relevant IGR cells for redressal of grievances if any. Commission s view This issue pertains to the Commission s Interim Order dated October 15, 2009 whereby consumers of RInfra were allowed to exercise choice of availing supply from TPC while being connected to the distribution system of RInfra. As such if a consumer has any issue with regard to the space that he/she has made available to RInfra and how the same is to be dealt with once the said consumer has exercised the choice of availing supply from TPC is not a matter which could be called into question for disqualifying RInfra from grant of licence. If RInfra fails to obtain the licence, then obviously, such consumers will have to deal with the new licensee in accordance with the requirements laid down in Regulation 5.5 of the Supply Code Regulations. The objector has not explained as to how the provision of making available by way of lease, a piece of land or a room to the Distribution Licensee for installation of a distribution transformer to enable the provision of supply, could be a ground for disqualifying an applicant from the grant of distribution licence. Objection 11: Consumer disputes not settled RInfra has not settled the disputes of many consumers, who were promised refund of the amount spent by them to construct the room/structures for establishing the consumer substation or distribution substation on the land not belonging to RInfra or hired by RInfra. They have been marked as their own assets or termed as perpetual agreements. RInfra s response As per the Commission s Order dated February 20, 2004 in matter of grant of rebates by M/s BSES Ltd, RInfra was restrained from continuing this practice. The same was directed by the Commission even in BSES (presently RInfra) tariff Order dated July 1, Order- Case 65 of 2011 Page 11 of 38

12 Commission s view If RInfra has not settled the disputes of consumers, then the aggrieved consumers should initiate appropriate proceedings as may be advised in law. If any such issue is surviving, the matter may be brought before the appropriate forum by application / petition. However, the objector has not explained as to how such an allegation could be a ground for rejecting the grant of distribution licence. In any case, this matter is beyond the ambit of consideration for grant of Distribution Licence and is not a matter which could be called into question for disqualifying RInfra from grant of licence. Salient features of RInfra s application 14. The salient features of RInfra s application are highlighted below (identified against each section of the data format of the application specified in the MERC General Conditions of Distribution Licence Regulations, 2006): Part/Section Description Details provided Part A: General Information General Information RInfra has provided all the basic details as specified in this section of the application. Primary contact details, registered office details, registration number, date of Part A: 7 (c) Part A: 7 (c) Name and addresses of the Board of Directors Ownership/Shareholding pattern Part B: 1 Memorandum and Articles of Association (in case of a company) as in force on the date of application Part B: 2a An organization chart detailing the management structure of the Applicant, which shall include incorporation and registration are provided. RInfra has provided details of the Board of Directors and promoters in Annexure 1 of their application RInfra has provided the shareholding pattern in Annexure-2 of their application. According to the Annexure, the promoter group holds 47.73% of the total shares; institutional investors hold 37.65% of the share and 14.25% is held by noninstitutional investors. None of the promoters shares has been pledged as on March 31, The largest shareholder is AAA Project Ventures Private Ltd, which hold 46.99% of the shares. RInfra has provided a copy of the Memorandum of Association & Articles of Association in Annexure 3 of their application form. The Organization chart is attached in Annexure-4 of the RInfra s application form. The distribution business is headed by Shri. Lalit Jalan, who is the CEO. Order- Case 65 of 2011 Page 12 of 38

13 Part/Section Description Details provided information (in respect of operations, projects, commercial, finance, regulatory IT and HR functions) a) Senior Executive Management (along with curriculum vitae); corporate shared services. Part B: 2b b) Board of Directors (along with curriculum vitae); Part B: 2c Number of middle/lower management personnel Part B: 2d Relationship (including intending relationship, where applicable between the Applicant and key.. to the application for grant of Licence. Part B: 3, 4 Details of Income tax PAN/TAN; Details of import licence, if any Part B: 5 Bank references asserting that the Applicant is financially solvent Part B: 6 Part B: 7 Part B: 8 Annual Audited Reports for the past 3 years for the Applicant and for any Holding Company, Subsidiary or affiliated company (if any). Any other documentary evidence to substantiate the financial capabilities, technical competence and others. Details of the actual or proposed location of the system of electric lines and electrical plant by means of which the RInfra has submitted all the necessary information with respect to the management details in Annexure-5 of its application. The same is elaborated in the section on Management expertise. It has also submitted that some of the corporate functions like legal; finance and HR are RInfra has submitted that it has 7 Directors on the Board. The details of their Board of Directors are provided in the Annual report of RInfra, which was attached along with the application form in Annexure-9. No. of middle management personnel 272 No. of lower management personnel 1203 RInfra stated that this is not applicable. It mentioned that presently it is managing the Electricity Distribution business in Mumbai licensed area The details of the Income tax PAN and TAN are given. It has mentioned that it does not have an import licence. Canara bank has provided the solvency certificate and has mentioned in their certificate that Reliance Infrastructure Limited is respectable and can be treated as good up to a sum of Rs. 14, crore. RInfra has provided its Annual Reports for the financial years FY08 - FY10. The same are attached in Annexure-7 to Annexure-9 RInfra has stated about its capabilities in Page of its FY-10 Annual Report. It has attached a document in Annexure-10 highlighting its achievements over the last few years in the Distribution business. RInfra has stated that the area of supply include the Mumbai suburban area apart from Bhandup and Mulund. In addition, BSES Ltd s licensed area included the area of the Municipal Council of Mira Order- Case 65 of 2011 Page 13 of 38

14 Part/Section Description Details provided applicant intends to enable Bhayandar till Thereafter, the distribution of electricity, Government of Maharashtra by a indicating which plant and lines are to be constructed and which are existing plant and lines, and the Notification dated January 10, 1990 revised the Mira Bhayandar Municipal Council area to include the areas to the East covered by the revenue village of Chene area to which the and Varsova (additional area).rinfra has application for Licence proposed to include Chene and Varsova relates. which are contiguous to its area of supply. This would also fulfil the criteria of minimum area of supply as specified in the National Electricity Policy and the Distribution of Electricity Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Part B: 9 Detailed electrical distribution map or maps of the proposed geographical area of supply, on a scale of not less than 10 centimetres to a kilometre, The map shall clearly distinguish between the existing Conduct) Rules RInfra has provided the map in Annexure- 14, list of defence establishments in Annexure-14A and the list of local authorities in Annexure 14-B of their application form. system and new facilities. Part B: 10 Business plan details RInfra has provided a Business plan along with the application. The details of the Business plan are discussed in the Analysis of the Business plan section Part B: 12 Supporting information on compliance with the additional requirements prescribed by the Central Government, as may be applicable. Part C Format for assessing competence of applicant RInfra did not submit this information in its initial application on April 25, The Commission highlighted this data gap. RInfra in response to this, submitted an undertaking by the Company Secretary on May 2, 2011 RInfra has submitted all the information required under Part-C of the application except the details on its Top-5 Projects and whether the company would employ a contractor for the creation of assets. The Commission highlighted these data gaps. RInfra gave details of its Top-5 Projects and the details of whether it would go for an EPC contractor or not. RInfra, in response to this vide its letter dated May 4, 2011 submitted the details of Top-5 projects executed by RInfra. (Letter No. Order- Case 65 of 2011 Page 14 of 38

15 Part/Section Description Details provided MERC/Case No. 65 of 2011/00215). Evaluation of RInfra s eligibility for grant of Distribution Licence 15. On the date of expiry of the present licence of RInfra, another Licensee viz., Tata Power Company Limited (TPC), would exist in the same area. Hence, the issue of grant of licence to more than one person in the same area will arise. In such a situation, the sixth proviso to Section 14 of the 2003 Act, contemplates that an applicant where there already exists a Licensee in the same area for the same purpose must comply with the additional requirements relating to the Capital Adequacy, Creditworthiness, and Code of Conduct as may be prescribed by the Central Government. This would be without prejudice to the other conditions or requirement, if any, under the 2003 Act. The sixth proviso to Section 14 is extracted as follows:- Provided also that the Appropriate Commission may grant a Licence to two or more persons for distribution of electricity through their own distribution system within the same area, subject to the conditions that the applicant for grant of Licence within the same area shall, without prejudice to the other conditions or requirement under this Act, comply with the additional requirements relating to the Capital Adequacy, Creditworthiness, and Code of Conduct as may be prescribed by the Central Government, and no such applicant, who complies with all the requirements for grant of Licence, shall be refused grant of Licence on the ground that there already exists a Licensee in the same area for the same purpose: 16. Accordingly, the provisions of the Distribution of Electricity Licence (additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005 notified by the Central Government as per the provisions of Section 14, have been applied in the present case. The extracts thereof are as follows:- 3. Requirements of capital adequacy and creditworthiness.- (1) The Appropriate Commission shall, upon receipt of an application for grant of licence for distribution of electricity under sub-section (1) of section 15 of the Electricity Act, 2003, decide the requirement of capital investment for distribution network after hearing the applicant and keeping in view the size of the area of supply and the service obligation within that area in terms of section 43. (2) The applicant for grant of licence shall be required to satisfy the Appropriate Commission that on a norm of 30% equity on cost of investment as determined under sub-rule (1), he including the promoters, in case the applicant is a company, would be in a position to make available resources for such equity of the project on the basis of Order- Case 65 of 2011 Page 15 of 38

16 networth and generation of internal resources of his business including of promoters in the preceding three years after excluding his other committed investments. Explanation: - For the grant of a licence for distribution of electricity within the same area in terms of sixth proviso to section 14 of the Act, the area falling within a Municipal Council or a Municipal Corporation as defined in the article 243(Q) of the Constitution of India or a revenue district shall be the minimum area of supply. 4. Requirement of Code of Conduct.- The applicant for grant of licence shall satisfy the Appropriate Commission that he has not been found guilty or has not been disqualified under any of the following provisions within the last three years from the date of the application for the grant of licence: (a) section 203, section 274, section 388B or section 397 of the Companies Act, 1956; (b) section 276, section 276B, section 276BB, section 276C, section 277 or section 278 of the Income tax Act, 1961; (c) section 15C, section 15G, section 15H or section 15HA of the Securities and Exchange Board of India Act 1992; (d) clause (b), (bb), (bbb), (bbbb), (c) or (d) of sub-section (1) of section 9 of the Excise Act 1944; (e) section 132 or section 135 of the Customs Act 1962, and that the applicant is not a person in whose case licence was suspended under section 24 or revoked under section 19 of the Act, within the last three years from the date of application: Provided that where the applicant is a company, it shall satisfy the Appropriate Commission in addition to provisions of this rule that no petition for winding up of the company or any other company of the same promoter has been admitted under section 443 (e) of the Companies Act, 1956 on the ground of its being unable to pay its debts. 17. Apart from the above requirements, according to the sixth proviso to Section 14, licence can be granted only to those applicants, who would distribute electricity through their own distribution system. 18. The Commission assessed RInfra s eligibility for grant of the distribution license on the basis of the framework described above, and various information provided in RInfra s application and other submissions made by RInfra from time to time. Accordingly, the Order- Case 65 of 2011 Page 16 of 38

17 Commission used the following criteria to determine RInfra s eligibility for grant of distribution licence: Minimum area of supply requirement (E1) Capital Adequacy requirement (E2) Creditworthiness requirement (E3) Code of Conduct requirement (E4) Requirement of own network rollout plan (E5) Minimum area requirement (E1) 19. Till 1985, BSES Ltd s licensed area included the area of Municipal Council of Mira Bhayandar (as it was known then). Thereafter, the Government of Maharashtra (GoM) by a notification dated January 10, 1990 revised the area of Mira Bhayandar Municipal Council to include the areas to the East covered by the revenue villages of Chene and Varsova (additional area). 20. By notification in Gazette Extra Ordinary dated December 1, 2001, the Govt of Maharashtra ( GoM ) declared that the whole of the local area comprising the Mira Bhayandar Smaller Urban Area should cease to be a Municipal Area from February 28, In the same Extra Ordinary Gazette, the said area was further notified as larger urban area as a municipal corporation by the name of Mira-Bhayandar Municipal Corporation with effect from the same date. RInfra provided copies of such notifications of the GoM along with its application. 21. RInfra has sought a licence to distribute electricity in and around suburbs of Mumbai as mentioned in the 2008 Regulations plus the area of Chene and Varsova, which are contiguous with its existing area of Licence. In its application under affidavit, RInfra stated that it proposed to include the additional areas of Chene and Varsova to fulfil the criteria of minimum area of supply as specified in the Distribution of Electricity Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, RInfra has applied for an area, which covers Mira Bhayandar Municipal Corporation completely. 22. The Commission is of the view that the area of supply as proposed by RInfra in its application for grant of Distribution Licence conforms to the minimum area of supply in terms of the Explanation to Rule 3 of the Distribution of Electricity Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, The proposal entails supplying to the entire area covered by the Mira Bhayandar Municipal Corporation. Therefore, the prescription that the area falling within a.municipal Corporation..shall be the minimum area of supply, is fulfilled. Therefore, the Commission is of the view that in totality the minimum area of supply requirement in terms of the Explanation to Rule 3 of the Distribution of Electricity Order- Case 65 of 2011 Page 17 of 38

18 Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005 stands complied with. Capital Adequacy requirement (E2) 23. To comply with the Capital Adequacy requirement laid down in the said Rules 2005 of the Central Government, RInfra was required to satisfy the Commission that it has the ability to make available equity to the extent of 30% of the capital investment requirement for distribution in the proposed area of supply. It is also specified that such ability is to be assessed based on the Networth and internal resource generation of business and promoters in the preceding three years after excluding other committed investment. 24. The applicant was asked to submit a certificate providing computation details about its financial parameters namely Internal Resource Generation and Networth. For the purpose of computation of these parameters, only audited annual accounts were to be considered. Such accounts include all the assets and liabilities owned by the applicant entity. In other words, if the applicant owns distribution assets existing in the proposed area of supply, the value of those assets would anyway get captured in such computations. In such case, even if the capital investment requirement may be incremental, the Capital Adequacy cannot be assessed in incremental manner. Because, it is not possible to obtain the audited annual accounts, which exclude the value of distribution assets existing in the proposed area of supply. Therefore, the Commission found it appropriate to consider the applicant s audited annual accounts, which include all assets and liabilities. And accordingly, it proceeded to determine the capital investment required for rolling out a new distribution system in the proposed area of supply. 25. It is specified in the Rules that the Commission needs to determine requisite capital investment based on the size of area and the universal service obligation. The Commission is of the view that accurate estimation of capital investment requirement is not a necessary exercise for the purpose of grant of licence. The central idea is to have a fair estimate of such capital investment requirement. After hearing the applicant and considering the area for which licence is sought for, the Commission arrived at an estimate of capital investment requirement based on publicly available information and other material in the possession of the Commission. According to such estimate, the capital investment requirement shall be to the tune of Rs. 4,640 crore. 26. Therefore, on a norm of 30% equity, the total equity investment required is about Rs. 1,392 crore. The Commission feels that under the dynamics of capital markets, a company may choose not to invest all the equity/ share capital from its own resources. It is reasonable to expect that the company shall invest at least 26% of the total equity requirement from its own resources to have sufficient control in terms of controlling stake and voting rights in the said licensed business. Therefore, RInfra needs to invest a minimum equity capital of Rs. 362 crore. Order- Case 65 of 2011 Page 18 of 38

19 27. The Central Govt. Rules, 2005 states,... satisfy the Appropriate Commission that... a company, would be in a position to make available resources for such equity of the project... Accordingly, the applicant may opt to the equity for the required capital investment through multiple avenues along with its own resources. It may dilute its ownership in this distribution business to raise equity from outside sources to fund capital investment. Therefore, it is assumed that the applicant will form a Special Purpose Vehicle (SPV) for the proposed distribution business. Even if the applicant may decide not to form such SPV, the Commission, for the purpose of evaluation of eligibility of the applicant and to give effect of the provisions of the said Rules, 2005, has assumed such SPV while assessing Capital Adequacy and Creditworthiness requirements. 28. If other investors infuse significant equity in the proposed distribution business, they may get representation in the Board of Directors. For the decisions regarding capital investment in the proposed distribution business, the applicant has to obtain approval from its Board of Directors. If the investments are in the interest of the business, the Board would support such decision for such investments. Therefore, major hurdles in getting Board s approval for such investments are not anticipated. 29. However, it is possible that the applicant s share in equity reduces substantially due to external infusion of equity. It would, still be fair to assume that the applicant continues to hold its primary interest in the distribution business and therefore in holding the Distribution Licence. Hence, it will ensure its control over the critical decisions regarding this business. Therefore, it shall hold minimum 26% of total equity in proposed distribution business, so that, independently, it can block special resolutions, which are not in the interest of the company. Therefore, the minimum equity requirement from the applicant at any point in time shall not be less than 26% of total equity. 30. According to the Distribution of Electricity Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005 the Capital Adequacy has to be assessed based on Networth and Internal Resource Generation of preceding three years. As the 2003 Act or the Rules of the Central Government do not specify any method of computing Networth and Internal Resource Generation, the Commission adopted the method specified by the Central Government in the Standard Bidding Documents for procurement of power through tariff based Competitive Bidding under Case 2. The formula for Networth computation adopted by the Commission is as below: Networth = Equity Share Capital + Reserves and Surplus - Revaluation Reserves - Intangible assets - Miscellaneous Expenditure to extent not written off and carry forward losses The formula for Internal Resource Generation computation adopted by the Commission was as below: Order- Case 65 of 2011 Page 19 of 38

20 Internal Resource Generation = Profit after Tax + Depreciation and Amortization + Decrease in Net current Assets (Excluding cash) + Any other non-cash expenditure (including deferred tax) Scheduled loan repayments and increase in net current assets (excluding cash) The following two tests were considered, while assessing capital adequacy of the applicant. It is important to note that both the below-mentioned tests had to be separately passed. Test 1: Is the maximum of (NW1, NW2, NW3) CE CIC AND Test 2: Is five (5) times the maximum of (IRG1, IRG2, IRG3) CE CIC Where: IRG1: Internal Resource Generation for the last audited financial year IRG2: Internal Resource Generation for the year before the last audited financial year IRG3: Internal Resource Generation for two years before the last audited financial year CE: 26% of the Committed Equity investments elsewhere CIC: 26% of (30% of Capital Investment Criteria) as estimated from capital expenditure requirement NW1: Networth for the last audited financial year NW2: Networth for the year before the last audited financial year NW3: Networth for two years before the last audited financial year The multiplying factor for Internal Resource Generation (IRG) is taken as five (5), which reflects the number of years needed to setup the distribution system in the applied licence area. 31. RInfra was asked to submit the computation of Networth and Internal Resource Generation (IRG) certified by the Managing Director/ Chief Executive Officer/ Manager (authorized through a board resolution), being a full time director on the Board of the Company and the statutory auditor as per the formula specified above, through MERC letter dated June 10, Order- Case 65 of 2011 Page 20 of 38

21 RInfra vide its letter dated June 14, 2011, submitted the computation of Networth and Internal Resource Generation for the company on a standalone basis as per audited financial statements, which is shown below. Table 1 : RInfra - Networth and IRG on a standalone basis (Rs. crore) FY FY FY Networth 11, , ,607.8 IRG 1, , , The Networth as on March 31, 2010 is Rs. 14,607.8 crore that is the maximum in the preceding 3 years. Its maximum IRG over the last 3 years was Rs. 3,105 crore in FY RInfra had a negative IRG in FY To assess whether the applicant has committed investments tied up in other projects, RInfra was asked to submit this information through letter dated May 25, As per the Distribution of Electricity Licence (Additional requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005, such commitments need to be excluded while deriving capital adequacy. RInfra vide its letter dated May 30, 2011 informed the Commission that it has a commitment of investments in projects other than the proposed area of supply, worth around Rs 37,568 crore. Out of which, Rs 22,968 crore will be funded through debt, Rs 9,461 crore through equity and Rs 5,142 crore through grants. For adjustment of such commitments while deriving capital adequacy, only equity component of the other committed investments will be relevant. However, with increasing avenues to raise equity, the applicant may choose not to bring the entire equity for other committed investments from its own resources. It can be fairly assumed that minimum equity contribution from an applicant may be 26% of the total equity, which is sufficient for stopping any special resolution and maintaining a control in the said committed investments. Therefore, for the adjustment related to other commitments, 26% of committed equity in other committed investments has been considered which amounts to Rs. 2,460 crore. 34. Therefore, according to the test determined by the Commission, the Networth, adjusted for the committed equity investments elsewhere, is computed to be Rs.12,148 crore. However, RInfra is required to satisfy the Commission that the minimum of Rs. 362 crore for this licensed business is potentially available as explained in Para 26. Its adjusted Networth (Rs. 12,148 crore) is greater than the equity requirement (Rs. 362 crore). Therefore, the Commission is of the opinion that RInfra satisfies the Networth criteria. 35. Additionally, according to the test determined by the Commission, the IRG, adjusted for the equity investments committed elsewhere, was computed to be Rs.13,065 crore. RInfra needs to satisfy the Commission that minimum of Rs. 362 crore for this licensed business is potentially available as explained in Para 26. The adjusted IRG (Rs. 13,065 crore) is greater than the equity requirement (Rs. 362 crore). Hence, RInfra satisfies the IRG criteria. Order- Case 65 of 2011 Page 21 of 38